McCall Manufacturing Has a WACC of 10

question 60

Multiple Choice

McCall Manufacturing has a WACC of 10%.The firm is considering two normal,equally risky,mutually exclusive,but not repeatable projects.The two projects have the same investment costs,but Project A has an IRR of 15%,while Project B has an IRR of 20%.Assuming the projects' NPV profiles cross in the upper right quadrant,which of the following statements is CORRECT?

• A) Each project must have a negative NPV.
• B) Since the projects are mutually exclusive,the firm should always select Project B.
• C) If the crossover rate is 8%,Project B will have the higher NPV.
• D) Only one project has a positive NPV.
• E) If the crossover rate is 8%,Project A will have the higher NPV.

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Definitions:

Insurable Interest

A requirement that a person seeking to purchase an insurance policy must have a stake in the well-being of the person or property insured.

Endorsement

The signing of one’s name on the back of a negotiable instrument for the purpose of negotiating it to another.

Premiums

Payments made regularly to an insurance company in exchange for coverage, representing the cost of the insurance policy.

Co-insurance Clause

A provision in insurance policies requiring the policyholder to bear a portion of the loss by maintaining coverage of a specified percentage of the value of the property to receive full reimbursement.